Deflation in Malaysia causing growth risks to rise

Malaysia Posts Second Month of Deflation as Growth Risks Rise

Malaysia recorded a second month of deflation in February as fuel prices dropped, a worry for policy makers at a time when economic growth is also under pressure.

Consumer prices fell 0.4 percent from a year ago after dropping 0.7 percent in January, the statistics agency said in a report on Friday. The last time Malaysia was in deflation was in the aftermath of the global financial crisis in 2009, when the economy was in recession.

The drop in prices has fueled speculation the central bank will be among the first in Southeast Asia to cut interest rates this year. Growth risks are also rising in an economy that’s so far been buoyed by resilient exports, with a slowdown in China and broader global demand pressures set to limit expansion.

Malaysia’s government has said the decline in prices is due to temporary factors, such as fuel costs, and not a sign of falling demand or recessionary factors as in 2009. The central bank left its key rate unchanged at 3.25 percent in March, saying inflation will remain low for now.

This news explains the deflation situation that Malaysia is currently experiencing. Deflation is defined as the general decline in prices for goods and services occurring when the inflation rate falls below 0%. This scenario can bring detrimental effects to multiple groups of people in the economy, causing negative consequences.

A deflationary environment is often looked as unwanted, as it can hint signs of the country entering a recession. This type of environment is generally bad for investors and poses a headache for policymakers. A decrease in value of money is negative for corporate earnings. Firms also experience weaker demand, at the same time face a struggle to increase their price and services.

Looking at deflation from the consumer perspective, deflation will make people feel poorer. As they know their properties and investments will all be worth less tomorrow. This decrease in consumer confidence makes they hold back spending as they expect price to get even lower. Thus business suffers, and they will stop investing too as the demand in the market is low. This will lead to lower profits and a higher unemployment rate for the economy overall.

There are some past examples demonstrating how deflation can be. The Great Depression in 1929 is a classic example of how deflation harms the entire economy. It began after the stock market crash of October 1929, which sent the American economy in panic and harms millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. In 1933 when the depression is at its extreme, 15 million Americans were unemployed and nearly half the country’s banks had failed.